Tag Archives: S&P

There is a crisis of confidence in elected and unelected officialdom across the planet.

Whether we watch the scenes from Egypt, Brazil and Turkey or read of the horrendous problems at Morecambe and Thamesmead closer to home along with the allegations surrounding the Care Quality Commission (CQC) and government, as we witness elections in the UK and US attracting less and less voters at each election, it becomes ever clearer that confidence in those that have power has been lost.

Hundreds of years ago, when most believed that those in power were born to have it and exercise it and when information was so scarce, lack of confidence in the powerful would erupt only at times into outright hostility. If the French Revolution could be considered an example of such hostility, contrast that to the relative minimalism of 1968 or the banlieue rioting of a few years ago.

Today, the volcano is not sleeping but constantly rumbling with disquiet that breaks out not necessarily in revolution but in people power as shown by Erdem Gunduz’s standing man (duran adam) in Istanbul.

We are more knowledgeable and educated but we are no less intolerant and the expectation is more widespread. So, the rumbling goes on and our politicians – tied to their 19th Century establishments of power – are completely nonplussed and have no idea how to react.

The Power over Information

There are waves of contention that sweep across the centuries.

In the West, the political concepts of the 18th Century and before were founded often on religion and religious intolerance and rising nationalism – this remains the root cause of many conflicts in the Middle East still;

those of the 19th Century on nationalism;

those of the 20th Century on dogma – fascism / nazi-ism, socialism, communism;

the 21st Century still has resonances of all those centuries and many countries remain hidebound by the blood-thirst of years gone by.

However, each century brings its own challenges while technology does much to change our thinking and understanding. In Europe, the invention of the printing press enabled the spread of knowledge beyond the priests and monks who kept power through their monopoly of the printed word.

In the eighteenth century, Thomas Paine brought his word to the attention of the masses through documents like the Rights of Man that fuelled rebellion in the USA and France.

Writers like Dickens in the 19th Century caused the wealthy to respond to the crimes committed against the poor of London and the South of England – leading to the philanthropic movement.

This century’s challenge is about the battle between mass information centralism and decentralism caused by the Internet and cheaper and cheaper forms of computer and mobile technology. It is driven by the extraordinary advances in information, learning and education for most sectors of the world. It is driven by the power that such information provides and the desire of those in power to retain it.

Edward Snowden’s rebellion is about information and the central authority of the National Security Association in the USA to plough information furrows in search of masses of data (see excellent article by Kenneth Roth). Technology now allows so much information to be gathered that those in power’s natural default is to take it. Snowden rebelled in the way he thought right – his own 21st Century revolution in the same way that Wikileaks did or Bradley Manning attempted – their own duran adam.

Elsewhere, it is the gaining of information that empowers those who rebel against what they see as the wrong use of power. From radio to TV and to the internet and social networks, information in the hands of increasingly better educated citizens means that their concerns can be better disseminated and groups can more easily coalesce. From the printing press to the telegraph and now to social networks running on mobile phones, the acquisition of knowledge and the crowd forming opportunities available (online and offline) challenge authorities worldwide. In Turkey, The Hurriyet Daily, in one comment piece, headlined: ‘Twitter versus Prime Minister Erdogan’. The “democratic coup” in Egypt was fuelled by the rapid dissemination of information to a population where many tired quickly of the deceit of power.

The Long Tail and “Power Law”

With the extraordinary advances in technology and information, society is splitting into those that have control over it and those that don’t. This is seen clearly in the financial crash of 2007/8. Leading up to this, the banks that control much of the information upon which our economies rely were able to manipulate that information and thereby also manipulate the so-called analysts and quality assurance organisations (like the ratings agencies – Moody’s, S&P and Fitch). They do so still.

The increasing use of social networks and of online systems puts the mass of information in the hands of governments and large corporations. Big data (metadata) means that individual citizens are merely part of the “long tail”, while those who run the large corporations remain independent. There are individuals and there is the long tail. They call the long tail the outcome of a power law – no better description.

Orwell saw this “power law” clearly in his “1984” but could not foresee the means that would be available to those who stand at the top of the big data (as opposed to those who stand beneath or within it). There is a real danger that as society becomes more separated by data collection, we will see confidence in institutions and governance erode progressively more – a leaking of trust that is already weak.

The reason for this is that those within the long tail, despite being so far away from the centre, still have access to large amounts of data – just not in a controlling manner as individuals. This access means that they understand the problems they are facing much more than the militants of previous centuries.

The Information Revolution

Jaron Lanier – a leading thinker on information systems and a pioneer of virtual reality – has written in “Who Owns the Future?” about the destruction of the middle class and the propensity of information systems to force us into the long tail.

The information revolution may not be the stable process that we want it to be. It may be that independent revolutions (like those of Snowden or Bradley Manning) become more common as the common man and woman show their own discontent with the world of big data.

Duran adam – standing man – is one individual silently standing up against centralized power – just like those at Tiananmen Square or Tahrir Square. This stand requires some thought because while the situation in Turkey can be improved by government listening to its people, the answer to the information problem is less clear – even if both require huge changes in thinking.

On the problem in Turkey, the issue is an old one (or a group of old ones): secular versus religious, centralized versus real democracy. In Egypt, it is similar (if more violent).

In the era of big data, the problem that Edward Snowden exposed is the same one that exists outside of the Internet – that centralized power with control of information is often corruptive. At a more micro level, that is why the Morecambe Bay hospitals issue (where the CQC is alleged to have suppressed a damning report on care in hospitals -that is claimed by campaigners such as James Titcombe – who lost his nine-day old baby son in that hospital – to have caused loss of life) is similar to Edward Snowden’s concerns.

Power over information – such as at the CQC – can be wholly corruptive. This provides a glimpse into the potential solutions – which are transparency and access to information. It always was, of course, but larger organisations like the NHS (the UK’s National Health Service) easily become power drunk (especially in a secretive nation like the UK). The same is true in Turkey and Egypt. The same is true at the NSA. This power relies on information.

The release valves are (1) transparency – the same transparency called for in dictatorships where money is looted on a grand scale; (2) access to data – sharing between the centre and the long tail.

It is not too simplistic to say that transparency and data access are at the heart of the problem in the information battles of the 21st Century. Power centres based on information only function because they have more information than those outside their circle.

This has been so throughout history – from before Pheidippides and his Marathon run to Rothschild and his use of advance information to be the first to know (and profit from) Napoleon’s defeat at Waterloo. Advanced democracies now need to take the next step – the provision of information as the default and a requirement on all governments and companies to make information available unless they can justify the opposite.

The Moral Maze on BBC Radio 4 debated the issue of transparency this week – endeavouring to determine where the boundaries were. David Leigh – formerly of the Guardian argued well for greater access of information for ordinary citizens.

Diane Coyle in “The Economics of Enough” proposed experiments in the use of the Internet to engage citizens. We already have this. Organisations like Avaaz, Witness and 38 Degrees are already providing experiments. These are not-for-profits set up to access information – including much user-generated content – to create access for citizens and pressure on government and companies. Nowhere in Diane Coyle’s book does it mention the opportunities created by such organisations – Government, public sector and corporations have so much power that top economists like her do not consider the power of citizens to collaborate that already exists.

The problem is that individually lobbyist activities like the three mentioned address the power of the Internet to pursue specific causes – often not the root cause of the Power Law over Information. Those like Wikileaks attack the issue head-on – quite some experiment that has seen Julian Assange holed up in the Ecuadorian Embassy in London for over a year. The experiments with the Internet – bringing information and access to information to citizens – is under way. We are all already part of it: active or passive.

The question is whether the Long Tail of Information gets to be wagged.

Or a case of: Absent owners, managers that act as if they own and get paid as if they take all the risks

Since the banking crisis that became a sovereign debt crisis, the world has begun to focus on the huge salaries and bonuses that are paid to bankers and top business people. In the last week, Barclays Bank announced that over 400 of their staff earned over £1 million in the last financial year.

Whereas those who place their financial lives on the line by building their own businesses and then, if successful, reap the financial rewards – but, if not successful, may lose everything – remain in high esteem amongst most people, those that risk no financial penalties whatsoever (but take massive salaries) have slipped further and further down in the public’s esteem quotient.

Senior managers and directors of major companies (including banks) and sales staff that take home huge bonuses (especially in banking and finance) are no longer lauded for any value they bring amidst a view that their rewards are far too high bearing in mind the lack of risk that they have. This has resulted in the EU plans to limit the bonus payments to bankers – an extraordinary intervention in the marketplace.

Does the marketplace work?

Stock markets are deemed to be the best place to see demand and supply at work. There is more data collected on stock prices than anything else and it goes back hundreds of years. Constant pressure on transparency and liquidity means that markets like the US (DOW, S&P, Nasdaq) and the London Stock Exchange (and others of similar size and liquidity) ensure that supply and demand usually results in a price that means something.

While this has changed markedly with the intervention of computer-driven buying and selling as well as the fact that around 70% of stock is owned by institutions, nevertheless stock markets appear to be mainly market driven. That never means the price is “right” – markets provide a price on any day that may be driven by a myriad of reasons. However, the market price is the price and buyers and sellers are able to take legitimate decisions whether to buy or sell.

Secondary markets

The owners of stocks and shares have, in the vast majority of cases, bought those stocks and shares in a secondary market – long after the IPO. While the majority of today’s owners of Facebook may be IPO buyers, this is only because the company had its IPO just months ago. For the rest of the publicly traded corporate sector, buying shares has little to do with the company involved.

Ownership of a share means potential increase in capital value and dividends growth – and some ownership rights which are rarely used by the individual buyer (although Martin Sorrell is facing some pressure from recently voluble fund holders). Shareholders are primarily interested in the value of the stock – almost unrelated to the company.

Robert Beckman, a well-known business writer from the 1990’s, estimated that 70% of a share’s value related to the way the market was going, 20% related to the industry and only 10% related to the individual stock. If true, this means that ownership of shares in the quoted sector is almost unrelated to the individual stock and owner responsibilities are negligible and rarely used.

In addition, the development of the joint stock company limits the risk to just the loss of the investment and no more (unless buying stocks through leveraged schemes or option trading).

Ownership means almost nothing these days when that ownership is in a publicly traded company.

Staff acting as owners

Lack of ownership in publicly traded companies (the understandable move away from the 19th Century where owners were managers), means that senior managers now act as owners. While it is absolutely true that managers spend considerable time talking to representatives of shareholders (pension funds and similar) and to others who write on their stocks (such as journalists), this is to keep the price up in the market relative to other stocks in the secondary market. It is part of the process of market transparency. Today, that is the main connection between management and owners (at least in terms of the value placed on the stock).

The Board (with non-execs here to represent the shareholders) carries out primarily a governance role and has, usually, a compensation committee. Their job is to see that senior staff are paid a salary commensurate with the market or whatever and to secure senior staff in their jobs. This crucial role has, of course, been shown to be spurious in recent years.

The banking crisis has shown that there is no such thing as market rates for top staff in major corporations. Has it been just a way of jockeying for position that seeks to provide pay at the highest levels possible? CEO’s claim that they need to be paid international salaries to stay in their UK jobs no matter how poorly their companies’ share price performs.

Recent comments from those involved in the industry show how few CEO’s move abroad or from abroad to the UK. This basic tenet is mistaken, let alone the requirement to pay huge commissions to banking staff when their risk – like those of CEO’s – is no more than to keep their basic pay (already substantial) or in the worst case lose their job. This is completely unlike the entrepreneur, who has both management and ownership, and the heaviest of financial risks – the potential to lose his / her financial assets as well as their job. Both get potentially great rewards, but their risks are completely different.

Market rates of pay are notoriously difficult to derive. Where there is a vast statistical database, then it is possible – although here the markets are driven in different directions by groups of people getting together in unions to drive up market rates (and other forms of benefits).

The shareholder / manager dilemma

This can be stated for modern corporate life (in publicly traded companies) as:

Owners that stand back too far leaving managers that act as if they own companies and get paid as if they take all the risks

The issue is important for many reasons. We now have huge and dominant multinational corporations. We have shareholders that seek high and constant returns but have no affinity to the companies they “own”. We have managers that are (too?) highly paid and have wrestled a much higher share of the companies’ income to themselves than ever could have been envisaged and (in the UK and the USA at least) with over-dominant banking and financial centres which have tended to suck the life out of the entrepreneurial sectors rather than giving it life.

Can Shareholder Activism be Re-ignited?

As the West sinks dismally into austerity and behind the newly developing economies of China and India, where corporate ownership is complicated by government (intervention or direct ownership), we need a rebalancing away not just from banking and finance to areas of real value creation. We also need incentives for owners to own and managers to understand and accept real risk before they can access the type of returns that real entrepreneurs can access.

This will (if it is possible) drive any massive returns to the holders of real risk – those who can lose everything or gain massively. This is not the lot of managers – whose risk profile is slanted to the positive and whose manipulative skills are far greater than the quasi-shareowners buying their ownership in secondary marketplace.

Entrepreneurship is at the heart of business and growth of any economy. But, it is stifled by the rise of the manager in publicly traded companies where that rise absorbs far too much of the value created.

Shareholders are slow to act as they are, in the main, too far from the action, unknowing or a manager themselves – as in pension funds.

Now, the UK coalition government will be giving shareholders the right in annual general meetings to reject senior Directors’ pay proposals. The EU is considering the same thing. So, the pendulum is swinging in the direction of shareholder activism after many years of drift and decay. On both sides of the Atlantic, it is necessary for shareholders – who actually, in law, own companies, to assert themselves in pay and other issues. Economies in the West are dividing between those who are in control of an unrealistic share of corporate income (and in 2011, FTSE Directors pay rose 49% while average pay in the UK rose just 2%) and others. The others are shareholders and other employees.

A true market can only operate where monopolies fear to exist. It is apparent that quoted company directors have been able to set their salaries within a close market situation. In a long recession that we have seen in the West since 2008, it would be remarkable for there not to be a kick-back against the ability of one sector of society to benefit so much. Asking for constraint is insufficient. Markets have to be enabled and the recent moves to encourage shareholders to be more active and to give some powers that actually work are in the right direction.

Now it is up to the shareholders (basically, the senior staff of fund-holders like pension funds) to bare their teeth – like they are doing at WPP – and show that just because they go to the same clubs and come from the same schools, shareholders can be properly represented and the market for top directors’ pay can be made efficient.

A Proposal or Three

With stocks bought in a secondary market where ultimate owners have little or no real understanding of the business or ownership responsibilities, it seems reasonable to require large owners of shares to take their responsibilities more seriously – how should secondary market shareholder activism become real? Some suggestions:

Proposal 1: all owners of more than 1% of shares of any traded company should be required to nominate a non-executive director or actively support the nomination of one proposed by another such organization.

Proposal 2: such organizations, who normally buy shares on behalf of others (pension funds, hedge funds or similar) should ask their own investors (mainly those who put their savings into those companies – not just their own shareholders) to vote on their proposals.

Proposal 3: all such organizations have to register as “major shareholders” when they accrue over 1% of stock in a company and the FSA / Stock Exchanges should monitor the job they individually do to actively monitor companies – in the same way that organizations monitor MP’s voting.

All the above relies on making this easy – e.g. online only voting within pension funds and similar (i.e. no computer access, no vote) but, in an age of digitization and where companies and owners are so disconnected, secondary markets need to become activated.